At the present time, Western Gas & Electric Company (WGC) has 20-year noncallable bonds with a face value of $1,000 that are outstanding. These bonds have a current market price of $1,382.73 per bond, carry a coupon rate of 13%, and distribute annual coupon payments. The company incurs a federal-plus-state tax rate of 35%. If WGC wants to issue new debt, what would be a reasonable estimate for its after-tax cost of debt (rounded to two decimal places)? (Note: Round your YTM rate to two decimal place.)
4.60%
5.18%
6.61%
5.75%
Coupon = 13% of 1000 = 130
YTM = 8.85%
Keys to use in a financial calculator:
FV 1000
PMT 130
N 20
PV 1,382.73
CPT I/Y
After tax cost of debt = 0.0885 (1 - 0.35)
After tax cost of debt = 0.0575 or 5.75%
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